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The Mexican economic crisis: alternative views

Author

Listed:
  • Marco A. Espinosa-Vega
  • Steven Russell
Abstract
The authors of this article suggest that many of the explanations for the 1994 crisis are based on questionable assumptions and dubious analysis. They contend that, when trying to explain the crisis, most authors have concentrated on the wrong economic \"fundamentals.\" They challenge the conventional view that the crisis was caused by a combination of flawed fiscal, monetary, and exchange rate policies. Their explanation for the crisis belongs in an alternative camp that emphasizes the vulnerability of the Mexican financial system to swings in expectations and investor confidence. ; In their view, the Mexican financial crisis was an expectations-driven liquidity crisis that shares many similarities with the financial panics that afflicted the U.S. economy during the late nineteenth century. The immediate cause of the Mexican crisis was political turmoil that created concern among foreign lenders about the safety of their investments. Mexican borrowers' \"over-reliance\" on short-term liabilities made both individual borrowers and the financial system extremely vulnerable to the adverse political events that shook the confidence of foreign investors. ; This article's principal policy recommendation is for the Mexican government to set up a system of term-graduated multiple reserve requirements for banks (\"circuit breakers\"). These would give financial institutions (and direct borrowers) strong incentives to lengthen the average term of their debts and make the country's financial system less susceptible to liquidity crises. The average term of the government's liability portfolio would also increase, reducing its own vulnerability to liquidity crises.

Suggested Citation

  • Marco A. Espinosa-Vega & Steven Russell, 1996. "The Mexican economic crisis: alternative views," Economic Review, Federal Reserve Bank of Atlanta, vol. 80(Jan), pages 21-44.
    • Handle: RePEc:fip:fedaer:y:1996:i:jan:p:21-44:n:v.80no.1
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    File URL: https://www.frbatlanta.org/-/media/documents/research/publications/economic-review/1996/vol81no1_espinosa-russell.pdf
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    References listed on IDEAS

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    Cited by:

    1. Moreno-García, Elena, 2007. "Análisis y clasificación de las explicaciones a la crisis financiera mexicana de 1994," eseconomía, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(15), pages 29-52, tercer tr.
    2. Michael J. Chriszt, 2000. "Perspectives on a potential North American monetary union," Economic Review, Federal Reserve Bank of Atlanta, vol. 85(Q4), pages 29-38.
    3. Mathur, Ike & Gleason, Kimberly C. & Singh, Manohar, 1998. "Did markets react efficiently to the 1994 Mexican peso crisis? Evidence from Mexican ADRS," Journal of Multinational Financial Management, Elsevier, vol. 8(1), pages 39-48, January.
    4. Bustelo, Pablo, 2000. "Novelties of financial crises in the 1990s and the search for new indicators," Emerging Markets Review, Elsevier, vol. 1(3), pages 229-251, November.

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